Ireland And Portugal Are In Far Worse Shape Than Their Official Credit Ratings Imply

According to Moody's the market's implied credit rating for Ireland and Portugal dropped even further last week. The gap between the credit rating Moody's assigns the two nations 'Aa2' and 'A1', is now enormous given the market is pricing in a 'Ba1' and 'B1' rating respectively.

credit investors are differentiating among sovereigns that have been caught up in the debt crisis. A case in point is the difference between the direction in the market implied ratings of Ireland, Portugal, and Spain. At the peak of the crisis in May, Spain and Ireland were trading roughly in line on a CDS-implied basis, although Spain’s bond-implied rating had taken a much larger hit, having started from a higher level (Figure 4). However, while both the bond- and CDS-implied ratings of both Ireland and Portugal have steadily deteriorated since the end of July, those of Spain appear to have begun a leveling-out process in the last several weeks.

The charts below give a sense of the decline in credit ratings implied by the market, with Ireland in the top graphic and Portugal below it.